The Government Procurement Reform Act requires public bidding in all procurement of infrastructure, goods and services. Section 10, Article IV of the Government Procurement Reform Act provides:

Section 10. Competitive Bidding – All procurement shall be done through Competitive Bidding, except as provided for in Article XVI of this Act. (Emphasis supplied)

In addition, Section 4 of the Government Procurement Reform Act provides that the Act applies to government procurement “regardless of source of funds, whether local or foreign.” Hence, the requirement of public bidding applies to foreign-funded contracts like the ZTE Supply Contract.

Respondents admit that there was no public bidding for the ZTE Supply Contract. Respondents do not claim that the ZTE Supply Contract falls under any of the exceptions to public bidding in Article XVI of the Government Procurement Reform Act. Instead, private respondent ZTE Corporation claims that the ZTE Supply Contract, being part of an executive agreement, is exempt from public bidding under the last sentence of Section 4 of the Government Procurement Reform Act. Thus, private respondent ZTE Corporation argues:

x x x Section 4 of RA 9184 itself expressly provides that executive agreements that deal on subject matters covered by said law shall be observed. Hence, the requirement of competitive bidding under section 10 of the law is not applicable. Section 4 of RA 9184 provides:

Section 4. Scope and Application. – This Act shall apply to the procurement of Infrastructure Projects, Goods and Consulting Services, regardless of source of funds, whether local or foreign, by all branches and instrumentalities of government, its departments, offices and agencies, including government-owned and/or controlled corporations and local government units, subject to the provisions of Commonwealth Act No. 138. Any treaty or international or executive agreement affecting the subject matter of this Act to which the Philippine government is a signatory shall be observed.

x x x

There is no provision in the Executive Agreement that requires the conduct of competitive public bidding before the award of the NBN Project, or any project envisioned in the RP-China MNOU for that matter. The subsequent exchange of notes between China and the Philippines clearly shows that ZTE was chosen as the contractor for the NBN Project. This was formalized through the DTI-ZTE MOU and the ZTE Supply Contract. (Boldfacing and underlining in the original)

Private respondent ZTE Corporation’s argument will hold water if an executive agreement can amend the mandatory statutory requirement of public bidding in the Government Procurement Reform Act. In short, the issue turns on the novel question of whether an executive agreement can amend or repeal a prior law. The obvious answer is that an executive agreement cannot amend or repeal a prior law.

Admittedly, an executive agreement has the force and effect of law, just like implementing rules of executive agencies. However, just like implementing rules of executive agencies, executive agreements cannot amend or repeal prior laws but must comply with the laws they implement.[23] Only a treaty, upon ratification by the Senate, acquires the status of a municipal law. Thus, a treaty may amend or repeal a prior law and vice-versa.[24] Hence, a treaty may change state policy embodied in a prior law.

In sharp contrast, an executive agreement, being an exclusive act of the Executive branch, does not have the status of a municipal law. Acting alone, the Executive has no law-making power. While the Executive does possess rule-making power, such power must be exercised consistent with the law it seeks to implement.

Consequently, an executive agreement cannot amend or repeal a prior law. An executive agreement must comply with state policy embodied in existing municipal law. This Court has declared:

International agreements involving political issues or changes of national policy and those involving international arrangements of a permanent character usually take the form of treaties. But international agreements embodying adjustments of detail carrying out well-established national policies and traditions and those involving arrangements of a more or less temporary nature usually take the form of executive agreements.[25] (Emphasis supplied)

Executive agreements are intended to carry out well-established national policies, and these are found in statutes.

In the United States, from where we adopted the concept of executive agreements, the prevailing view is that executive agreements[26] cannot alter existing law but must conform with all statutory requirements. The U.S. State Department has explained the distinction between treaties and executive agreements in this manner:

x x x it may be desirable to point out here the well-recognized distinction between an executive agreement and a treaty. In brief, it is that the former cannot alter the existing law and must conform to all statutory enactments, whereas a treaty, if ratified by and with the advice and consent of two-thirds of the Senate, as required by the Constitution, itself becomes the supreme law of the land and takes precedence over any prior statutory enactments.[27] (Emphasis supplied)

As Professor Erwin Chemerinsksy states, “So long as the (U.S.) president is not violating another constitutional provision or a federal statute, there seems little basis for challenging the constitutionality of an executive agreement.”[28] In the United States, while an executive agreement cannot alter a federal law, an executive agreement prevails over state law.[29]

Likewise, Professor Laurence H. Tribe states that an executive agreement cannot override a prior act of Congress even as it prevails over state law. Thus:

x x x Although it seems clear that an unratified executive agreement, unlike a treaty, cannot override a prior act of Congress, executive agreements, even without Senate ratification, have the same weight as formal treaties in their effect upon conflicting state laws.[30]

Professor Tribe cited United States v. Gary W. Capps, Inc.,[31] where the Court of Appeals (4th Circuit) ruled that an unratified executive agreement could not prevail over a conflicting federal law. The U.S. Supreme Court affirmed the appellate court’s decision but on non-constitutional grounds.

Clearly, an executive agreement must comply with well-established state policies, and these state policies are laid down in statutes. The Government Procurement Reform Act has laid down a categorical state policy – “All procurement shall be done through Competitive Bidding,” subject only to narrowly defined exceptions that respondents do not invoke here. Consequently, the executive agreement between China and the Philippines cannot exempt the ZTE Supply Contract from the state policy of public bidding.

Private respondent ZTE Corporation further claims that the ZTE Supply Contract is part of the executive agreement between China and the Philippines. This is plain error. An executive agreement is an agreement between governments. The Executive branch has defined an “international agreement,” which includes an executive agreement, to refer to a contract or an understanding “enteredinto between the Philippines and another government.”[32]

That the Chinese Government handpicked the ZTE Corporation to supply the goods and services to the Philippine Government does not make the ZTE Supply Contract an executive agreement. ZTE Corporation is not a government or even a government agency performing governmental or developmental functions like the Export-Import Bank of China or the Japan Bank for International Cooperation,[33] or a multilateral lending agency organized by governments like the World Bank.[34] ZTE Corporation is a business enterprise performing purely commercial functions. ZTE Corporation is publicly listed in the Hong Kong and Shenzhen stock exchanges, with individual and juridical stockholders that receive dividends from the corporation.

Moreover, an executive agreement is governed by international law.[35] However, the ZTE Supply Contract expressly provides that it shall be governed by Philippine law.[36] Thus, the ZTE Supply Contract is not an executive agreement but simply a commercial contract, which must comply with public bidding as mandated by the governing law, which is Philippine law.

Finally, respondents seek refuge in the second sentence of Section 4 of the Government Procurement Reform Act:

Section 4. Scope and Application – This Act shall apply to the Procurement of Infrastructure Projects, Goods and Consulting Services, regardless of the source of funds, whether local or foreign, by all branches of the government, its departments, offices and agencies, including government-owned and/or-controlled corporations and local government units, subject to the provisions of Commonwealth Act No. 138. Any treaty or international or executive agreement affecting the subject matter of this Act to which the Philippine government is a signatory shall be observed. (Emphasis supplied)

Respondents argue that the second sentence of Section 4 allows an executive agreement to override the mandatory public bidding in Section 10 of the Government Procurement Reform Act.

Respondents’ argument is flawed. First, an executive agreement, being an exclusive act of the Executive branch, cannot amend or repeal a mandatory provision of law requiring public bidding in government procurement contracts. To construe otherwise the second sentence of Section 4 would constitute an undue delegation of legislative powers to the President, making such sentence unconstitutional. There are no standards prescribed in the Government Procurement Reform Act that would guide the President in exercising such alleged delegated legislative power. Thus, the second sentence of Section 4 cannot be construed to delegate to the President the legislative power to amend or repeal mandatory requirements in the Government Procurement Reform Act.

Second, under Section 10 of the Government Procurement Reform Act, the only exceptions to mandatory public bidding are those specified in Article XVI of the Act. These specified exceptions do not include purchases from foreign suppliers handpicked by foreign governments, or from suppliers owned or controlled by foreign governments. Moreover, Section 4 of the Government Procurement Reform Act mandates that the “Act shall apply to the Procurement of Infrastructure Projects, Goods and Consulting Services, regardless of source of funds, whether local or foreign x x x.”

Third, the second sentence of Section 4 should be read in conjunction with Section 4 of the Foreign Borrowings Act,[37] which provides:

Section 4. In the contracting of any loan, credit or indebtedness under this Act, the President of the Philippines may, when necessary, agree to waive or modify the application of any law granting preferences or imposing restrictions on international competitive bidding, including among others, Act Numbered Four Thousand Two Hundred Thirty-Nine, Commonwealth Act Numbered One Hundred Thirty-Eight, the provisions of Commonwealth Act Numbered Five Hundred Forty-One, insofar as such provisions do not pertain to constructions primarily for national defense or security purposes, Republic Act Numbered Five Thousand One Hundred Eighty-Three: Provided, however, That as far as practicable, utilization of the services of qualified domestic firms in the prosecution of projects financed under this Act shall be encouraged: Provided, further, That in case where international competitive bidding shall be conducted preference of at least fifteen per centum shall be granted in favor of articles, materials, or supplies of the growth, production or manufacture of the Philippines: Provided, finally, That the method and procedure in the comparison of bids shall be the subject of agreement between the Philippine Government and the lending institution. (Emphasis supplied)

Likewise, Section 4 of the Government Procurement Reform Act should be read in conjunction with Section 11-A of the Official Development Assistance Act of 1996:[38]

Section 11-A. In the contracting of any loan, credit or indebtedness under this Act or any law, the President of the Philippines may, when necessary, agree to waive or modify the application of any provision of law granting preferences in connection with, or imposing restrictions on, the procurement of goods or services: Provided, however, That as far as practicable, utilization of the services of qualified Filipino citizens or corporations or associations owned by such citizens in the prosecution of projects financed under this Act shall be prepared on the basis of the standards set for a particular project: Provided, further, That the matter of preference in favor of articles, materials, or supplies of the growth, production or manufacture of the Philippines, including the method or procedure in the comparison of bids for purposes therefor, shall be the subject of agreement between the Philippine Government and the lending institution. (Emphasis supplied)

Consequently, as construed together, the executive agreements mentioned in the second sentence of Section 4 of the Government Procurement Reform Act should refer to executive agreements on (1) the waiver or modification of preferences to local goods or domestic suppliers;[39] (2) the waiver or modification of restrictions on international competitive bidding; and (3)the method or procedure in the comparison of bids.

The executive agreements cannot refer to the waiver of public bidding for two reasons. First, the law only allows the President to “waive or modify, the application of any law x x x imposing restrictions on international competitive bidding.” The law does not authorize the President to waive entirely public bidding but only the restrictions on public bidding. Thus, the President may restrict the public bidding to suppliers domiciled in the country of the creditor. This is the usual modification on restrictions imposed by creditor countries. Second, when the law speaks of executive agreements on the method or procedure in the comparison of bids, the obvious assumption is there will be competitive bidding. Third, there is no provision of law allowing waiver of public bidding outside of the well-defined exceptions in Article XVI of the Government Procurement Reform Act.

Respondents, while not raising this argument, cannot also rely on Section 1 of the Foreign Borrowings Act, which provides:

Section 1. The President of the Philippines is hereby authorized, in behalf of the Republic of the Philippines, to contract such loans, credits, including supplier’s credit, deferred payment arrangements, or indebtedness as may be necessary and upon terms and conditions as may be agreed upon, not inconsistent with this Act, with Governments of foreign countries with whom the Philippines has diplomatic or trade relations or which are members of the United Nations, their agencies, instrumentalities or financial institutions or with reputable international organizations or non-governmental national or international lending institutions or firms extending supplier’s credit deferred payment arrangements x x x . (Emphasis supplied)

A solitary Department of Justice opinion[40] has ventured that the phrase “as may be necessary and upon terms and conditions as may be agreed upon” serves as statutory basis for the President to exempt foreign-funded government procurement contracts from public bidding. This is a mistake. This phrase means that the President has discretion to decide the terms and conditions of the loan, such as the rate of interest, the maturity period, amortization amounts, and similar matters. This phrase does not delegate to the President the legislative power to amend or repeal mandatory provisions of law like compulsory public bidding of government procurement contracts. Otherwise, this phrase would constitute undue delegation of legislative power since there are no standards that would guide the President in exercising this alleged delegated legislative power.

What governs the waiver or modification of restrictions on public bidding is Section 4-A of the Foreign Borrowings Act, which authorizes the President to, “when necessary, agree to modify the application of any law x x x imposing restrictions on international competitive bidding.” Section 4 is the specific provision of the Foreign Borrowings Act that deals with the President’s authority to waive or modify restrictions on public bidding. Section 1 of the Act does not deal with the requirement of public bidding. Besides, if Section 1 is construed as granting the President full authority to waive or limit public bidding, Section 4 becomes a superfluous provision.

In any event, whatever doubt may have existed before has been erased by the enactment in 2003 of the Government Procurement Reform Act, which reformed the laws regulating government procurement. The following provisions of the Act clearly prescribe the rule that government procurement contracts shall be subject to mandatory public bidding:

Section 3. Governing Principles on Government Procurement. – All procurement of the national government, its departments, bureaus, offices and agencies, including state universities and colleges, government-owned and/or controlled corporations, government financial institutions and local government units shall, in all cases, be governed by these principles:

(a) Transparency in the procurement process x x x.

(b) Competitiveness by extending equal opportunity to enable private contracting parties who are eligible and qualified to participate in public bidding.

x x x.

Section 4. Scope and Application. – This Act shall apply to the Procurement of Infrastructure Projects, Goods and Consulting Services, regardless of source of funds, whether local or foreign, by all branches and instrumentalities of government, its departments, offices and agencies, including government-owned and/or controlled corporations and local government units, x x x.

Section 10. Competitive Bidding. – All procurement shall be done through Competitive Bidding, except as provided for in Article XVI of this Act. (Emphasis supplied)

The only exceptions to mandatory public bidding are procurements falling under any of the narrowly defined situations in Article XVI of the Act, which respondents do not invoke.

Foreign-funded projects of the government are not exempt from public bidding despite executive agreements entered into by the Philippines with creditor countries or lending institutions. In Abaya v. Ebdane, Jr.,[41] the Court cited Memorandum Circular No. 104 dated 21 August 1989[42] issued by the President:

x x x it is hereby clarified that foreign-assisted infrastructure projects may be exempted from the application of the pertinent provisions of the Implementing Rules and Regulations (IRR) of Presidential Decree (P.D.) No. 1594 relative to the method and procedure in the comparison of bids, which may be the subject of agreement between the infrastructure agency concerned and the lending institution. It should be made clear however that public bidding is still required and can only be waived pursuant to existing laws. (Italicization in the original of the Memorandum Circular; boldfacing supplied)

Executive agreements with lending institutions have never been understood to allow exemptions from public bidding. What the executive agreements can modify are the methods or procedures in the comparison of bids, such as the adoption of the competitive bidding procedures or guidelines of the Japan Bank for International Cooperation[43] or the World Bank[44] on the method or procedure in the evaluation or comparison of bids. It is self-evident that these procedures or guidelines require public bidding.

Even so-called tied loans from creditor countries cannot justify exemption from public bidding although the bidders may be limited to suppliers domiciled in the creditor countries. Such a geographic restriction on the domicile of suppliers can be the subject of an executive agreement as a modification of restrictions on international competitive bidding. A publication issued by public respondent National Economic and Development Authority summarizes the international practice on tied loans with respect to public bidding:

The conditions imposed by the donor on the recipient with respect to ODA utilization provide another basis for differentiating ODA. In particular, restriction of the geographic areas where procurement of goods and services are eligible for ODA funding make ODA loan/grant tied or untied with respect to source of procurement. Usually, bilateral ODA is tied to the donor country in terms of procurement. While competitive bidding is still practiced, qualified bidders for the supply of goods and services are confined to those firms which are owned or controlled by nationals of the donor country. x x x[45] (Emphasis supplied)

Even for tied loans, the international practice still requires public bidding although the public bidding is restricted only among suppliers that are nationals of the creditor country. In the present case, there was no such public bidding because the Export-Import Bank of China simply handpicked ZTE Corporation as the supplier of the goods and services to the Philippine Government.

That the funding for the ZTE Supply Contract will come from a foreign loan does not negate the rationale for public bidding. Filipino taxpayers will still pay for the loan with interest. The need to safeguard public interest against anomalies exists in all government procurement contracts, regardless of the source of funding. Public bidding is the most effective means to prevent anomalies in the award of government contracts. Public bidding promotes transparency and honesty in the expenditure of public funds. Public bidding is accepted as the best means of securing the most advantageous price for the government, whether in procuring infrastructure, goods or services, or in disposing off government assets.

Even in a Build-Operate-Transfer project where the proponent provides all the capital with no government guarantee on project loans, the law requires public bidding in the form of a Swiss challenge.[46] With more reason should a project financed by a tied loan to the government be subject to public bidding. There is no sound reason why the Philippine government should allow its foreign creditor in an already tied loan to handpick the supplier of goods and services.

A tied loan, driven by a handpicked supplier, violates the principle of fair and open process in government procurement transactions. Such a tied loan, which arbitrarily reserves a contract to a pre-determined supplier, will likely lead to anomalies. This is contrary to the state policies enunciated in Sections 27 and 28, Article II of the Constitution:

Section 27. The State shall maintain honesty and integrity in the public service and take positive and effective measures against graft and corruption.

Section 28. Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full public disclosure of all its transactions involving public interest.